Terry Baucher's New Year's prediction is that corporates and individuals will become increasingly squeezed by the taxman.

By Terry Baucher*

When Bob Dylan wrote “For the times they are-a -changing” back in 1964 he was referring to the massive social changes then happening.  In tax the times are always ‘a changing’, but it so happens I believe we are now seeing a major shift in attitudes towards taxation, as a result of which I boldly(ish) predict many tax rates will rise over the next five years throughout the developed world.  

Two incidents last week reinforced my conclusion:

 Last Monday the British Parliamentary Public Accounts Committee released its report on H.M. Revenue and Customs’ performance over the 2011-12 tax year.  During its public hearings the Committee heard from senior executives at multinational giants Amazon, Google and Starbucks who squirmed in embarrassment when the Committee highlighted the low levels of UK corporation they paid.  Not surprisingly, the Committee was scathing in its conclusions declaring “The UK Government needs to get a grip on large corporations which generate significant income in the UK but pay little or no tax”.  

The following day the Minister of Revenue Peter Dunne issued a media statement explaining some of the issues relating to taxing large multinational companies and announcing an IRD review on current tax practices.  

Bad moods and desperation

Both events reflect a changing mood world-wide amongst governments and their tax authorities.   Last month, Germany announced a review of the taxation of multinational companies and the Australian Tax Office released an exposure draft on transfer pricing, a practice commonly used by multinational companies to shift profits from high tax countries.   Three weeks ago,  the Australian assistant Treasurer David Bradbury castigated the use of structures such as the "Double Irish Dutch Sandwich." 

The response of the rather forlorn looking Google UK CEO that the company had complied with all UK tax laws didn’t cut much ice with the Public Accounts Committee.   Here in New Zealand the same line of reasoning didn’t help the Australian owned banks once the IRD and the courts looked more closely at transactions previously ruled legitimate.

Which leads us back to Brian whom (you may remember when we met him in my last column)  I concluded had fallen foul of the Supreme Court decision in Penny and Hooper v Commissioner of Inland Revenue. He therefore faces a bill not only for the income tax under paid and working for families credits over-claimed but shortfall penalties of up to 100% of the income tax avoided.    

Brian’s actions would probably be deemed to be tax avoidance which is not a criminal offence.  However, could the IRD adopt a different track?  Afterall, what is the difference between a welfare beneficiary making a fraudulent claim and Brian’s actions in restructuring his affairs to gain eligibility for Working for Families tax credits?   Is Brian’s case, an example of Denis Healey’s famous dictum “The difference between tax avoidance and tax evasion is the thickness of a prison wall”?  

Zero tolerance

The IRD’s attitude towards tax offenders has got noticeably tougher over the past decade.  In 2000 there were 314 prosecutions for “criminal” offences under the Tax Administration Act 1994.  In 2008 the number of prosecutions was 9,563 and in 2009 it was 8,316.  Many of those prosecutions involved false claims for charitable donation rebates or falsified GST invoices.   Brian’s actions are not significantly different and in the current atmosphere he is definitely flirting with disaster.  

Brian’s advisor is possibly at bigger risk judging by the Australian decision of R v Pearce & Others.  In that case three accountants were convicted and imprisoned for five years for conspiracy to defraud the Commonwealth of Australia.  The accountants had been involved in a mass marketed tax avoidance scheme the effect of which was to allow participants to claim greater deductions than actually were allowable.  In marketing the scheme the accountants concealed key facts from both participants and the ATO as they were concerned that otherwise the scheme would be challenged by the ATO.   This was a critical piece of evidence against the three accountants.  

Similarly, in August this year the accountancy firm KPMG paid US$456 million in fines, restitution and penalties to the United States Internal Revenue Service for its part in a fraud that generated at least US $11 billion dollars in false tax losses. 

The IRS is also prosecuting nine former KPMG staff, including six former partners and KPMG’s former deputy chairman, for their part in the fraud.  The IRS is very unforgiving of tax evasion as Al Capone will attest, so if convicted the former KPMG staff undoubtedly face lengthy stretches in jail.  (Incidentally, did you know that Enoch “Nucky” Johnson, the real life person on which Boardwalk Empire’s Nucky Thompson is based, also went to jail for tax evasion?) 

The taxman is not on your side

As yet there have been no comparable cases in New Zealand but I consider it is only a question of time.   It’s also worth noting that the Supreme Court since its inception has yet to rule in favour of the taxpayer in any case it has heard.  In this climate, the next time you hear of a “tax saving” scheme you should pause to consider whether what’s being pitched potentially crosses over from aggressive tax planning into criminal tax evasion.   Do you want to be the first to test Denis Healey’s maxim? 

This is my final column for the year.  Thank you to all my readers and for all your comments.  I hope you all have a great Christmas and my best wishes to everyone for a fantastic 2013.  

*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting Ltd.